Neuregulin-1 (Nrg1) and its receptor ErbB4 are encoded by genes that have been repeatedly linked to schizophrenia. Both genes are thought to play important roles in the development of brain circuitry, but their precise contribution to the disease process remains unknown. In this review, we summarize novel findings on the biological function of Nrg1 and ErbB4 in mice, with a focus on the development of inhibitory circuits in the cerebral cortex. We will also discuss how this basic knowledge may help us to understand the etiology of schizophrenia, and eventually lead to the development of novel therapies for treating the disorder.